Unpaid tax credits, logistical issues slow Inlet producers

The jack-up rig Randolph Yost is seen arriving in Cook Inlet in 2012 before Furie Operating Alaska used it to drill new wells in the Kitchen Lights Unit off Nikiski. That unit is now producing natural gas for Inlet utilities and Furie planned to drill with the Yost again this summer, but a combination of tax credit uncertainty and logistical issues led the company to postpone the effort. (Photo/Michael Armstrong/Homer News)

A pair of small companies working in Cook Inlet are trying to overcome funding shortfalls stemming from the State of Alaska not yet making good on promised tax credit refunds.

Furie Operating Alaska and BlueCrest Energy, both Texas-based independents, had to interrupt their 2017 work plans because expected tax credit repayments from the state did not come through.

BlueCrest CEO Benjamin Johnson said in a prior interview with the Journal that the state owes his company roughly $90 million in tax credits for drilling and development work done at its Cosmopolitan oil project before legislation passed to kill the tax credit program July 1. The state has paid BlueCrest $27 million for its refundable tax credits since the company purchased the “Cosmo” project in 2012, according to Johnson.

BlueCrest is the sole owner and operator of the Cosmo oil project on the edge of the Inlet near Anchor Point on the Kenai Peninsula.

He said in August the company hoped it would have to pause its drilling program only for a month or two after a well was finished in September, if private financing could be secured.

Oil industry backers have roundly criticized Gov. Bill Walker for vetoing $630 million worth of appropriations in 2015 and 2016 to pay the industry tax credits. Walker has been steadfast in his assertion that the state cannot afford to make the large credit payments while still in the midst of $2.5 billion-plus annual budget deficits.

On the other hand, the governor has also insisted he would like to see the state pay down on the obligation as soon as the Legislature passes fiscal reforms to balance the state budget. Walker’s original fiscal plan proposed in early 2016 included $1 billion to pay off the credits entirely.

This year the Legislature passed House Bill 111, which ended the program, but also appropriated just the $77 million minimum for credit payments in the operating budget while still at an impasse over a fiscal solution.

State statute outlines an oil price-based formula for the minimum amount the state should pay towards the credits in a given year should lawmakers chose to not pay them off entirely. Office of Management and Budget Director Pat Pitney told the Senate Finance Committee Oct. 31 that the 2019 fiscal year minimum payment would be $118 million. The 2019 fiscal year begins next July 1.

The Revenue Department estimates the state will owe $736 million in credits at the end of the current fiscal year and the balance — if continually paid at the minimum — should be paid off in 2024 or 2025.

BlueCrest’s 2018 plan of development for the Cosmopolitan Unit submitted to the state Division of Oil and Gas states the company finished drilling the 22,300-foot Hansen 14 well from its onshore drill pad Sept. 25.

The company has been producing a little more than 300 barrels of oil per day from Hansen 16, an exploration well drilled by ConocoPhillips prior to BlueCrest’s purchase of the project, according to state production data.

Once plugs are removed from the initial well and both are ready for production each should pump more than 1,000 barrels per day, according to Johnson.

The above ground portion of the Cosmo project is onshore; however the angled oil wells are aimed at an oil pool that is about three miles offshore and 7,000 feet underneath Cook Inlet.

In the coming year BlueCrest will be evaluating the drilling results from lateral wells off of the Hansen 14 and prior exploration well, company President John Martinek wrote.

Martinek wrote further that “BlueCrest’s plan is to drill at least one well in the 2018 drilling program.”

At this point that well is most likely to be another lateral off of Hansen 16 targeting a higher geologic formation, according to the plan document.

Johnson has said the Cosmo oil pool is confirmed to hold “many hundreds of million of barrels of oil” and could support seven years of continuous drilling.

The Cosmopolitan field also contains a large natural gas cap, but limited local demand and shifting state tax policy have delayed BlueCrest’s plans to develop it via an offshore platform, company officials have also said.

Kitchen Lights

Furie had big plans for the summer of 2017 when Vice President Bruce Webb spoke to the Journal in April, but a combination of unpaid credits and logistical challenges put much of the company’s plans on hold.

Furie operates the middle Inlet Kitchen Lights Unit from the Julius R natural gas production platform it installed in 2015. It currently produces about 14 million cubic feet of gas daily to fill the gas contracts it has with to local electric utilities. Another contract to supply Enstar Natural Gas Co. commences next April.

Furie leaders had intended to do a workover of the KLU-3 well, finish drilling its A-1 well and then drill another gas well and a deep oil test well, according to Webb.

However, the Legislature did not approve the state’s operating budget for fiscal year 2018 — which started July 1 — until June 22.

“Although the Randolph Yost jack-up rig was 100 percent staffed to commence drilling operations in April of this year, Furie was forced to delay its 2017 drilling plans — including purchasing tangible items with substantial lead times — until additional funding for the purchase of tax credits was approved by the Legislature and the governor,” Furie’s 2018 Kitchen Lights development plan states.

The document was sent to the Division of Oil and Gas Oct. 6.

Further, the tugboat needed to handle the large drilling rig’s anchor left the state for dry dock repairs in Singapore in mid-July, according to Furie. Given it was the only vessel in Alaska capable of handling the Randolph Yost anchor system and the lack of funds, the drilling program went awry.

Furie did manage to do maintenance work and upgrades to its platform and onshore facilities and had divers install supports to the 15-mile subsea pipeline that connects the two during the summer work season.

Going forward, “development will focus on additional wells for increased reserves and deliverability,” the plan states. “However, existing natural gas market constraints through 2019 may have an impact on the necessity of multiple wells.”

If the local gas market warrants, Furie will finish the A-1 well in 2018 and drill another gas well similar to the KLU-3. The company may opt to drill another exploration well or re-enter and deepen its KLU-4 exploration well, according to the plan.